How Silicon Valley makes billionaires
Venture Capital 101 (MBA 80/20: Silicon Valley Startups)
Modern-day Silicon Valley is the singular best time and place to start a company in the history of the world.
Silicon Valley venture capitalists invest $60 billion per year into startups — that’s $25 million dollars invested per working hour. Since 2006, 50% percent of all billion-dollar startups, and 77% of all $10 billion+ startups, have been founded in Silicon Valley. And as a result, Silicon Valley has the most billionaires per capita in the world.
The best way to understand how, and why, Silicon Valley has become so successful at producing billionaires is to follow the money: to understand who venture capitalists are, what makes them tick, and how they decide which startups are worthy of investment.
That’s the goal of this post, the second installment of MBA 80/20: Silicon Valley Startups — Venture Capital 101.
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Venture Capital 101
Some of the most important investment activity in Silicon Valley — and, therefore, the world — takes place on an unassuming suburban street in Menlo Park, California: Sand Hill Road.
Doesn’t look like much, but the buildings across the way belong to Lightspeed Venture Partners and Accel Partners. Combined, they have invested over $40 billion into startups like Facebook, Slack, Dropbox, Spotify, Etsy, Snapchat, Nest, GrubHub, Calm, and Zola. And that’s just two firms from a very long list of Sand Hill Road tenants.
$40 billion is a lot of money, and although the General Partners (GPs) that run these funds are doing just fine for themselves, they aren’t nearly rich enough to pony up tens of billions of dollars to invest in startups.
What that means is that VCs also have to raise money — and they do so from their investors: “Limited Partners.”
LPs are usually institutional money managers like pension funds, endowments, and sovereign wealth funds. Because they’re the ultimate source of money that makes the startup wheel turn, understanding what LPs want is key to understanding Silicon Valley as a whole.
⭐ To teach you more about Venture Capitalists and their LPs as efficiently as possible, I’ve put together three resources:
A video explaining the lifecycle of a normal VC fund, starting with raising money from LPs
A detailed post covering the math behind VC-led fundraising rounds: pre- and post-money valuations, dilution, pro rata rights, and more
An Excel workbook to give practical examples that test your knowledge of VC math
Without further ado, here’s Venture Capital 101 in 20 minutes or less: